The Influence of SME Ecosystems on the Global Economy

In developed countries plus China and India, small and medium-sized enterprises (SMEs) generate about a half of the GDP and jobs. In other developing countries, their share in the economy averages 33%. In Russia, SMEs make up 20% of the GDP, employing just a quarter of the population. While China has more than half of its exports coming through SMEs, in Russia this figure does not exceed 7%. The Russian authorities are taking steps towards giving SMEs a more pronounced role, viewing it as a way to improve the structure of the economy, spur innovation, and promote higher employment.

Small and medium-sized businesses drive many economies worldwide.

According to the Organisation for Economic Co-operation and Development (OECD), SMEs provide jobs to between 60% and 70% of the employed population in developed countries and to 80% in China.

The SME contribution to the economy is around 50% in the US, 47% in the UK, 57% in Germany, 60% in China, and 45% in India.

In China, small and medium-sized businesses account for 65% of patents, 75% of innovations in technology, and more than 80% of new products.

According to the World Bank’s estimates, over the next 15 years, SMEs will be creating four out of five new jobs in developing countries.

A considerable share of products made by SMEs is exported.

The OECD estimates that share at 25% to 35% for developed countries, adding that for certain economies the number can be even higher: around 40% in South Korea, more than 40% in the US and Germany, and over 50% in China.

In most countries, governments have been supporting SMEs for several decades now, offering government guarantees, subsidies, preferences in loans and taxes, consultancy services, and other privileges. In Russia, this is something SMEs currently lack:

According to the Global Entrepreneurship Monitor (GEM), Russia ranks last across its 60 member economies by number of individuals who intend to start a business. In 2016, it was as few as 5.2% of the respondents in Russia who shared that intention (yet, it is a two-fold increase compared to 2014). Only 17.9% of the respondents say that the region they live in offers a startup-friendly environment.

Personal income has been on the decline for the last three years, damaging the earnings of small businesses, where almost 40% of the companies operate in the wholesale/retail industry.

In 2016, the Government approved the Small and Medium-Sized Entrepreneurship Development Strategy 2030, with a number of initiatives already in effect.

Special terms and conditions for loans:

In 2015, the Federal Corporation for Developing Small and Medium Business (SME Corporation) was established. In 2016, the SME Corporation provided RUB 50 billion in guarantees under the 6.5% Programme.

SME Bank, which is part of the Corporation, introduced a dedicated lending programme for SMEs, having lended out a total of RUB 91 billion with a weighted average rate of 13.38% in 2016.

Tax and audit unburdening:

In 2017, the eligibility cap for taxpayers wishing to use the simplified tax system with a 6% income tax rate was raised from RUB 60 million to RUB 150 million in income.

From 1 January 2016 to 31 December 2018, legal entities and sole proprietors that qualify as small businesses (with revenue of RUB 800 million and below) are exempted from scheduled government audits (subject to certain exceptions).

Starting 1 January 2016, new sole proprietors that use either a simplified or a patent taxation system and engage in manufacturing, social, or academic activities enjoy a two-year tax break.

Subsidies and grants:

In 2017, the Government allocated RUB 7.5 billion in SME support across 82 Russian regions.

Preferential treatment in government contracts:

Government customers must contract at least 15% of their annual procurement from SMEs.

At government-run companies, small and medium-sized businesses must account for at least 18% of the total contract amount and at least 10% of direct contracts. Starting January 1, 2018, mandatory SME contribution under direct contracts will be raised to 15%.

According to the SME Corporation, in 2016 the largest customers contracted a total of more than RUB 1.511 trillion from SMEs.

Support for innovative SMEs:

The Foundation for Assistance to Small Innovative Enterprises in Science and Technology awards R&D grants to the best small businesses, with subsequent support in commercialisation.

In 2017, the SME Corporation is allocating RUB 1.8 billion to support startups.

Export support for products and services offered by SMEs:

According to the Ministry of Economic Development, 37 Russian regions have export support centres in place, with integrated hubs in 53 regions.

These and other initiatives are expected to double the SME contribution to Russia’s GDP, with the percentage of people employed by SMEs going up to 35%. According to the authors of the Strategy, this will become a driver to enhance innovation and improve the structure of the Russian economy while also securing a sustainably high employment rate.